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Minimising Your Tax & MaximisingYour Wealth

Should I register for VAT?

Newsletter issue - December 2019.

In broad terms, and subject to certain exceptions, a business will be required to register to charge and pay VAT once annual sales reach a pre-set annual threshold, which is currently £85,000. This threshold is determined by total sales and is not the same as total profits (which is generally sales minus expenses).

However, a business can register for VAT even if its turnover (total sales) is below the threshold and it may actually save tax by doing so, particularly if its main clients or customers are organisations that can reclaim VAT themselves.

Example

Bill is a non-VAT registered painter and decorator. He is a basic rate (20%) taxpayer. He buys a new ladder to use in his business, which costs him £100 plus VAT, so he pays a total of £120 (£100 plus VAT at 20%. Bill will set £120 as a cost against his business profits. As he is a basic rate taxpayer, he will save tax of £24 (£120 x 20%), so the ladder actually costs Bill £96. However, if he is registered for VAT, the £20 VAT paid on the item (the input tax) can be reclaimed and £100 is set against business profits for income tax. The tax reduction is therefore £20 (£100 x 20%) and the ladder costs £80 - saving £16 by being registered for VAT.

VAT-registered businesses supplying goods and services to private individuals often feel dis-advantaged compared to their non-registered counterparts because they have to charge an additional 20% on every bill issued.

A trader who does not want to have to register for VAT, may be able to stay below the annual VAT registration threshold by supplying labour-only services and getting customers to buy any goods needed themselves.

Deciding whether to register for VAT voluntarily before the registration threshold is reached is a big decision that can have lasting implications for the financial health of the business. Positive reasons supporting voluntary registration include:

Reclaiming VAT - although a registered business will have to charge VAT on goods and services (known as charging 'output tax'), it will also be able to reclaim VAT that it is charged by other businesses (known as 'input tax'). Where input tax exceeds output tax in a given period, the business will generally be able to reclaim the difference from HMRC.

Marketplace perceptions - some businesses choose to register for VAT in order to appear larger than they are. Customers are likely to be aware of the £85,000 registration threshold - and where a business is not registered, its customers will know that the business turnover is lower than this. A business may therefore consider registration as a way of increasing its standing amongst competitors, and in the eyes of clients.

What our clients say about us...

"Paul has provided accountancy services to my company for 2 years now. I can recommend Paul very highly; his skills as an accountant are highly detailed and professional and he is always available to provide advice. One aspect of the way Paul works that I greatly appreciate is a preference to meet face to face when there is a detailed conversation to be had. I personally find this more productive and is a benefit of working with a small accountancy firm that you wouldn't get with the large faceless providers."

"I couldn't ask for more from Paul as an Accountant. Paul has been accountant to Work Relief Charity Recruitment for just over a year now and is proving an invaluable asset. Accurate, knowledgeable, flexible with an emphasis on service delivery, I would recommend Paul's services to any organisation looking for an accounts professional."

Neil Price - Managing Director at Work Relief Charity Recruitment

"Paul was a referral from a family member when I started my business 2 years ago. As this was the first time I had ever run my own company I was totally clueless over the financial side of matters and was worried that I may have made mistakes in any of my accounting. I needn't have worried as after enaging Paul for a set monthly fee he was always there on the end of the phone for all sorts of questions I had and no matter how trivial they were Paul gave me all the information I required and more and did an excellent and painless job at the end of my first year! Couldn't ask for any better to be honest. Just two words - hire him!!!"